Tuesday, November 28, 2023
I’ve been thinking about real estate commissions. And wondering how they’re going to change.
Given the recent news with commission-related lawsuits, it seems a safe bet to expect change. But it’s hard to anticipate exactly what form that change will take.
One of the blessings and curses of being in an industry for 30-plus years is that you’re around long enough to see everything old become new again. Now and again, you also get to encounter something old get turned on its head and wrung out. I guess I’m not sure which category this settlement falls under.
Any in-depth look into how an industry sells its services to clients, and the value placed on those services, can seem unfavorable at first blush. A deep dive into pricing often feels gauche. However, we must also ask how are real estate salespeople different than any other salesforce who are trained in ways to get the highest possible price (commission) for the goods and services they offer?
If there is price fixing as alleged, how are discount brokers able to compete effectively in the space?
Is there something unique or complex about purchasing a home as opposed to ordering a pair of shoes or other commodity? I certainly think so.
These are fascinating questions, if not new ones, and they’re especially compelling at a time when the economic realities for homebuyers are increasingly difficult. It’s an interesting time for the industry to have to rethink how it prices services for buyers and sellers.
“The seller doesn’t pay the commission, the transaction does,” is an old familiar explanation for how the system has worked for several decades. Which is a different argument than the offensive “the commission is free for buyers,” which can sound like a rebate or kickback.
The supporting argument has been that the percentage paid to the buyers’ agent in the traditional “seller pays” model is to attract a wider pool of potential buyers to the property listing. It’s true too that sellers don’t pay any commission unless a transaction closes. However, the class of sellers who filed suit believe that they should not pay for the services of an agent whose job it is to represent the opposing side of the transaction through negotiation and closing.
It is true that the role of buyers’ agent has changed in the past 40 or so years. It used to be that the buyer did not have dedicated representation, and essentially all agents ultimately represented the seller. Buyers were right to demand an agent working for their benefit, and the buyer’s agent (and transaction agent in some areas) emerged as a popular model.
It’s also true that representing buyers used to be much more time and labor intensive. It meant combing physical MLS books to find listings that matched clients’ requirements. It meant physical tours of newly listed homes so the agent could preview and stay up on what was available in the market. It usually meant weekend after weekend of driving buyers around for showing after showing, if the prospective buyer wanted to see anything more than a grainy black and white thumbnail picture in the MLS book.
Times have changed.
That doesn’t necessarily mean there’s less for a buyer’s agent to do, however. Competing offers have emerged as a market reality in tight supply, as have pre-qualifications, environmental inspections and considerations, and a wider prevalence of HOAs. Navigating credit and personal issues for buyers has become more complex, too.
So what will most brokers do as a result of these court settlements? Most will probably require a signed Buyer’s Agency Agreement for their agents who represent buyers. Some agents have said they will keep solving transactional problems behind the scenes, but instead of doing that work quietly, they’re considering issuing activity reports to their buyers and sellers, to affirm the value of the service. Many have indicated their listing agreements and possibly board contracts will be updated to allow sellers to select whether they want listing only services or full service traditional commission splits for their listings.
One thing is for certain: the market will adapt and houses will continue to transfer ownership.
Another certainty: there will be unintended consequences. I have yet to hear how the agents of VA loan buyers will be compensated, since VA guidelines prohibit the buyer paying any real estate brokerage fees.
I am not certain that the FHFA will jump for joy at buyers being saddled with another 2-3% in closing costs, to cover the commission fees for their agent. This administration has been quite creative in and dedicated to driving costs for buyers down; this development is the opposite of help.
I think most buyers and sellers want full service real estate representation, and that most sellers will want to stay with the current pricing models. People generally want the services and expertise their real estate agents provide.
Practically, I have to wonder how most buyers would, in fact, pay a real estate commission before or at the closing. Most buyers are saving every last dime for their down payment and closing costs.
If the agreement allows a buyer to postpone the payment of their share of commission for a period of time post-closing, I guess residential brokers could get lien rights for unpaid commissions like some states currently allow for commercial transactions. If that happens, are new title requirements or exceptions going to be issued? Probably so. Will a lender allow for the possibility that their loan might be in second position behind a lien for unpaid buyer commission fees? It’s doubtful.
Younger first-time buyers might try to go direct to sellers and bypass the trusted advisor role of the realtor. Those of us who work in the business know that generally, deals like this often end up taking far more time and have far more turbulent outcomes than deals who have real estate agents on both sides of the transaction. We know, too, that first-time buyers often need the most assistance navigating the novel landscape.
So, these class action suits have created an environment for change. And change we will have.
Let’s make sure buyers and sellers get the quality service they deserve, at a price they can afford, in a manner that is transparent and functional for all involved.
Until next time,
Mary Schuster
Chief Knowledge Officer
October Research, LLC